The Korean War forged the link between U.S. defense spending and manufacturing, normalized government agencies controlling business, and helped develop Japan’s manufacturing capabilities.

By the late nineteenth century, Korea’s agrarian economy was intertwined with Japan’s, trading for food, manufactured goods, clothing, silver, and gold. In 1910, Japan annexed Korea through a treaty. Korea’s economy slowly changed from purely agrarian to include some manufacturing. Although the Japanese built roads and railroads and developed Korean industry, they treated Koreans as racial inferiors–particularly after militarists came to power during the 1930’s. After World War II, it was decided that Korea would be divided in half. Land above the thirty-eighth parallel would be supervised by the Soviet Union and that below the parallel by the United States. The two halves were to be reunited after a government was organized, a constitution written, and Korea stabilized for self-rule. This division of Korea caused protests all through the country.Korean War

Joseph Stalin, JosephStalin, leader of the Soviet Union, sought to increase the Soviet Union’s presence in Asia and ordered that a Communismcommunist government be established in northern Korea. In May, 1946, Kim Il SungKim Il Sung–a Korea-born major in the Soviet Army–was made head of the North Korean Communist Party. In August, 1946, nationalization of northern Korean industry began, at first including only industries that did business with Japan. However, all large and nearly all medium-sized Korean businesses had done business with the Japanese. Similarly, the Americans nationalized southern Korean companies owned by Japan or by Japanese nationals.

In 1947, President Harry S. Truman handed control of southern Korea to the United Nations (U.N.), which called for unifying elections. The Soviets refused. South Korea was thereafter considered a separate country by the United Nations. That same year, North Korea printed its own currency. In the spring of 1948, Stalin secretly approved a North Korean constitution, which was immediately passed by the People’s Assembly, and the Democratic People’s Republic of Korea (DPRK, commonly known as North Korea) was born. North Korea proclaimed it had the single constitution for the entire peninsula and refused to recognize South Korea. South Koreans were labeled separatists working for the Americans. Kim became secretary general of North Korea. In October, Stalin sent North Korea an invitation to establish friendly relations with the Soviet Union.

North Korea began a rapid economic advance. Harsh rule limited corruption, and a great deal of money and supplies flowed into the country from other communist nations. In return, North Korea exported raw materials and what little manufactured goods it produced. The North bought gas and oil at reduced rates and had guaranteed markets for its goods in the Soviet Union. Its military received the latest Soviet equipment. The Soviets also sent industrial machinery with the assumption that a prosperous North Korea would in time pay them back.

In 1948, Syngman Rhee, SyngmanRhee, with active support from the United States, was elected by a large majority as the first president of the Republic of South Korea (ROK, commonly known as South Korea). Rhee had lived abroad for many years, was a baptized Christian, and had a degree from Georgetown University and a Ph.D. from Princeton in international law. During the Japanese occupation, he was president of the Korean government in exile. Rhee was a fervent nationalist who hated communists and wanted capital development, but he was not above enriching himself from government funds. His government was corrupt, and Rhee was dictatorial and cruel to political opponents. South Korean leadership governed a country in social turmoil. There were street demonstrations in which police and demonstrators were killed, worker strikes, a communist insurrection in part of the South Korean army, a million refugees from the North entering the South’s major cities, food shortages, and South Korean communists agitating for reunification under Kim. President Rhee ordered South Korean communists jailed and tortured. With the help of the United States, he gave the large farms owned by landlords to one million sharecroppers. South Korea remained dependent on millions of dollars of foreign aid received each year from the United States. A South Korean military was organized in 1948 but was given few tanks or armor.

By 1948, the Korean peninsula was home to two separate countries with vastly different economies and philosophies, both wholly reliant on sworn enemies who were commencing the Cold War. Border skirmishes between North Korean and South Korean forces began almost immediately. The ideological and economic split between the two countries widened rapidly. A North Korean army was quietly assembled in 1948, with permission from Moscow. As a soldier, Kim gave considerable attention to building a formidable, well-trained, politically indoctrinated military. However, he overestimated support for communism in the South. In 1949, the United States Army began leaving South Korea. By 1950, there were fewer than five hundred American advisers left in the country. Stalin agreed to an invasion of the South, which began on June 25, 1950. The next day, Kim accused South Korea of attacking the North.

Seoul fell to the communists in three days, and by August, 1950, 90 % of South Korea was occupied. In September, General Douglas MacArthur’s army landed at Inchon and drove North Korean forces back into the mountains near the Korean-Chinese border. In November, the Chinese attacked across this border with 300,000 men, taking over the majority of fighting from the North Koreans. The U.N. forces retreated southward a second time. By December, Kim was back in Pyongyang in an underground bunker as the city was being bombed into ruins by U.N. planes. In the spring of 1951, U.N. forces counterattacked the exhausted Chinese, pushed them northward up the peninsula, until the thirty-eighth parallel was once again the dividing line between the two Koreas. In March, 1953, Stalin died, and the Soviets and Chinese made immediate peace overtures. A cease-fire was signed in July, 1953, although South Korea refused to sign it.

After World War II, President Truman, Harry S.Truman greatly cut the defense budget. By 1947, the U.S. Army had shrunk to 700,000 men, with two divisions fully ready for deployment. Much of the U.S. Navy’s equipment was placed in storage or cut up for scrap. Money saved was diverted to social programs. Truman ended World War II price-and-wage controls in 1946, creating a huge jump in prices and inflation that settled down within two years. Meanwhile, the United States was experiencing both an economic and a baby boom. The government eased the housing shortage by insuring mortgages for returning veterans up to 95 % of their cost, and the building boom grew larger. By 1950, there were fewer than 2 million unemployed, and the United States was a global economy–in fact, the strongest economy in the world. By 1950, inflation was again low and consumer goods were rolling off assembly lines into the homes of an enlarging middle class. Less-developed nations, particularly in Latin America, were tapped for cheap raw materials. The military regimes that dominated these countries were tolerated by the Americans because they kept communists out and resources flowing. The 1950 census tallied 151 million Americans, with an average wage of $60.53 per week–a new high.

Good times ceased at the close of 1950. The Chinese entered the Korean War in November, and by December, the military budget increased to $50 billion (from a postwar low of $13.5 billion), and inflation soared to 7.9 %. Corporate taxes and income taxes were raised and credit tightened. Nonmilitary spending, including social programs, was slashed 28 %. Citizens and companies hoarded goods. In December, 1950, Truman declared a state of emergency, which gave him wide executive powers. His Economic Stabilization Agency immediately canceled price increases by Ford, General Motors, and Chrysler, and reduced worker pay raises to put the economy on a war footing. Charles E. Wilson, head of the Office of Defense MobilizationOffice of Defense Mobilization (ODM), was given nearly free reign to channel materials into war industries, withholding a portion of them from the production of civilian goods. The ODM prohibited the expansion of factories producing domestic items but authorized the building of new defense factories in the South and the West.

By 1951, the war had affected U.S. businesses by tightly connecting industries to military spending, placing the U.S. economy on a war footing that would go on for decades, making federal regulation of businesses an accepted practice, and establishing Japan as a future business competitor.

The Cold WarCold War with the Communist bloc began before the Korean War and continued into the 1990’s. The war pumped millions of dollars for equipment and supplies into U.S. companies through defense contracts. The U.S. economy was so strong it could afford such massive expenditures (14 % of gross domestic product) and still build and maintain military bases within the country and across the globe. Federal budgets were written enabling the U.S. military to go to war at any moment. Companies such as General Electric, Boeing, Electric Boat, Northrop Grumman, Lockheed Martin, Raytheon, and BAE Systems grew huge and prosperous and employed tens of thousands. Defense plants and the money they generated were a large piece of the economy. The Korean War jump-started the link between business and the government that President Dwight D. Eisenhower called the Military-industrial complex[military industrial complex]“military-industrial complex.”

At the same time, federal regulation of the national economy and private business became more common. The Truman administration used nineteen war mobilization agencies to control the economy during the Korean War. The ODM managed and penalized private business. Government intervention to ensure economic stabilization became routine; federal agencies were created; and the size of U.S. bureaucracy increased.

The Korean War had the effect of making JapanJapan a major manufacturer of domestic goods. Japan’s industries had been destroyed during the war, and the country was struggling economically. The United States felt it was important that Japan recover quickly to fend off communist influence. It also needed supplies for its military, many of whom were based in Japan before going to the Korean War. Large contracts were written with the Japanese for supplies–ships, pharmaceuticals, oil, beer, and more–and large manufacturing companies, such as Mitsubishi, Sumitomo, and Mitsui, were saved from bankruptcy by U.S. investment. The U.S. government paid the Japanese government large sums for “special military procurement.” These payments amounted to 27 % of Japan’s total export trade. Supplies from Japan totaled $149 million in 1950 and $809 million in 1953. Japan’s economy grew 10 % a year. Toyota was given a contract to build trucks for the United Nations, and Sony was given a contract to produce tape recorders for American Armed Forces Radio. These early contracts helped Japanese manufacturers reestablish themselves. Soon, they began exporting goods to countries such as the United States. During the 1970’s, Japan gained market share in quality electronics and then automobiles. The United States became Japan’s biggest customer, buying 35 % of what it made. In 2007, Japan’s trade imbalance with the United States was $82.8 billion.

• Facts About Korea. Rev. ed. Elizabeth, N.J.: Hollyum, 1998. Great resource providing sections on history, the economy, and foreign relations.
• Halberstam, David. The Coldest Winter: America and the Korean War. New York: Hyperion, 2007. Last chapter provides consequences of the war.
• Hickman, Bert G. The Korean War and United States Economic Activity, 1950-1952. New York: National Bureau of Economic Research, 1955. A book of statistics and graphs that presents U.S. economic trends of the period.
• Martin, Bradley K. Under the Loving Care of the Fatherly Leader. New York: Thomas Dunne Books, 2004. The best text on North Korea and its economic ties with the Soviet Union.
• Pierpaoli, Paul G. Truman and Korea: The Political Culture of the Early Cold War. Columbia: University of Missouri Press, 1999. In-depth information on U.S. economics and society.
• _______. “Truman’s Other War: The Battle for the American Homefront, 1950-1953.” Organization of American Historians Magazine of History 14, no. 3 (Spring, 2000): 15-19. Short, excellent article on politics and business during the war.

Asian trade with the United States

Chinese trade with the United States

G.I. Bill

Government spending

Japanese trade with the United States

Military-industrial complex

Steel mill seizure of 1952

War surplus

Wars